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Optimistic Small Businesses Brave Uncertain Economy

Business partners Holly Hunt (left) and Valarie Shaw opened a tea shop in Phoenix in August. Despite the bad economy, Hunt raided her 401(k) and Shaw took out a second mortgage on her home to finance the business.

Despite a sluggish housing market and a lackluster recovery from a historically painful recession, some hardy entrepreneurs are braving the uncertainty of today's economy and dumping money into new storefronts.

Throughout the recession, a strip mall in Phoenix collected cobwebs. Except for a nail salon and two restaurants, it stood almost entirely empty. Then, this summer, things started looking up when a gym took over as the anchor tenant. But the gym shut down a month later.

Tanning salon owner Claudine Dimitriou had staked her own expanding business on the gym's success. Her business model revolved around attracting the gym's body-conscious clientele. Dimitriou felt as if she had a heart attack the day the gym closed.

Despite the economy, she is forging ahead with a construction crew and opening her second tanning salon, called The Beach, next-door to the former gym.

"For a while, everything I saw was closing and closing," Dimitriou says. "And there weren’t many people that were actually looking forward to ... opening new businesses. So now that's kind of changing -- slowly, but it is changing."

The Beach will open Oct. 1, and another gym is scheduled to move in to replace the failed one. Less comforting, though, is the fact that Dimitriou staked everything on this business, including $80,000 for tanning beds, computers and furniture.

"I've taken probably my last bit of what I call my ... safety nest and am putting it all into this," Dimitriou says.

Why take such a risk, with the country's unemployment rate near 10 percent and the economy growing more slowly than expected? According to Dimitriou, her existing salon is doing well enough to expand, and with 17 years of experience as a business owner, she says she thrives in difficult situations.

"I'm a very gut-check kind of person. So if I feel it, I do it," she says.

Dimitriou is not the only one who senses opportunity. According to the Kauffman Foundation, a group that tracks entrepreneurship, Arizona ranked third in 2009 for states with the highest rate of entrepreneurial activity in the U.S., behind Oklahoma and Montana. Dane Stangler of the foundation cites Labor Department statistics that show a slight uptick at the end of 2009 in the number of newly formed U.S. businesses.

"Whether you see [new businesses] as [optimistic] or wildly deluded, a lot of those businesses will be the ones that ... forge our economic future or ... build the recovery out of this recession," Stangler says.

Of course, even more businesses are shutting down. Government data show that the number of failed firms in March 2009 was 24 percent higher than those in March 2007.

According to a study published in July by the National Federation of Independent Business, which tracks the confidence of existing small businesses, optimism among small business owners has never been so low for so long.

"[Small business owners are] pretty pessimistic about the way things look, and they're not about to spend their capital on hiring or on expansion until they're more certain about what the future looks like," says economist William Dunkelberg of the National Federation of Independent Business.

Pessimism, however, has not stopped Valarie Shaw and her business partner, Holly Hunt, who are among the new business owners in Arizona who have risked their livelihoods in spite of the economy. Hunt says she raided her entire 401(k) to open a small tea shop in the same complex as Dimitriou's new tanning salon. Hunt's family and friends doubted the decision. Shaw took out a second mortgage on her home, and Fleur de Teas opened Aug. 4.

"You know, I think people need to have a little courage," Shaw says, "because if everybody goes around moaning about the economy, it sort of becomes a self-fulfilling prophecy."

Shaw admits that she has been scared along the way, but to her surprise, business has exceeded expectations. Hunt expects to replenish her 401(k) after just one year in business.

Shaw, Hunt and Dimitriou have optimistic neighbors. Just across the street, a wine bar is under construction, and next to that, a cupcake store just opened its doors.